The banking market in Latvia has been through a lot, and has changed lot. What is the role of formerly “non-resident” banks in the national economy today, and what do clients stand to gain? To find out, we talked to Roberts Idelsons, Chairman of the Board of “Signet Bank”, and Dmitrijs Latiševs, Chairman of the Board of BlueOrange Bank.
What events or factors have had the greatest impact on banks that were previously focused on servicing CIS clients? What are the current options for those banks and what are the new specialisation models?
Dmitrijs Latiševs, Chairman of the Board of BlueOrange: For many years, the banking sector in Latvia was intertwined with servicing foreign clients, which often operated via tax-haven businesses. Latvia was by no means the only state that was involved in this process — banks in Switzerland, Luxemburg, Austria, Czech Republic, Cyprus, Malta, and both of our neighbouring Baltic states often pursued similar business models. The situation changed with the large-scale financial crisis of 2008, as G20 leaders began to talk about large cash flows sheltered in offshore companies, with no taxes being paid. Major changes to how tax information should be exchanged were set in motion, and a lot of new money laundering regulations were enacted. Where historically money laundering would be a term related to crime and terrorist financing, tax evasion became a major focus for anti- money laundering (AML) regulators in this decade. European legislation now includes a number of legal standards requiring full- scale monitoring of client activities by banking institutions. Ten years ago, this was not the case. Today, AML compliance of client activities requires substantial expenditure on personnel and ambitious IT and software investments.
In light of these changes, in 2016 our bank realised that servicing international clients would take more and more investment and carry ever greater cost, while overexposing us to risk. It was clear to us that this business should be scaled down, but we needed to figure out what could replace the revenue. We decided to expand our local presence, seeking clients on the European market, and leverage online services.
What have we achieved so far? In the past year alone, we closed the accounts of thousands of international clients, who were holding approximately 350 million euros with us. We have been able to substitute some part of it by raising more deposits from local and EU clients. Expecting a drastic decrease in income from clients in this once-lucrative segment, we found other ways to generate revenue, significantly expanding active lending to the domestic market. In 2018, we allocated over 130 million euros toward loans for local entrepreneurs. Demand for loans on the market of Latvia is higher than the supply, particularly in the small and medium enterprise segment, which represents a business opportunity.
Roberts Idelsons, Chairman of the Board of Signet Bank: We have also increased our outreach and cooperation with local clients. Considering that the interest rates are approximately the same for all the lenders, a lot hinges on factors such as quick decision-making, an individual approach to the needs of clients, an ability to look deeper, structure our communication and experience with specific industries in which borrowers operate.
There is a belief that the local banking market is limited in scale and there is nothing to fight over. Do you agree?
Idelsons: Let’s compare to others sectors — taxi services, for example. Several years ago, you could have said the market was settled and had no place for new players. What about now? After Uber’s success, the market has completely changed. Take mobile phones, where just twenty years ago Nokia reigned supreme. Then Apple bucked the trend with its phone concept, and today the market is completely different. It happens in any industry: new players come in with new ideas, they innovate, they offer clients much more convenient service, and the market can change. Banking is no exception — just because someone took the lion’s share of the market at some point in history does not mean they will hold on to it forever.
Latiševs: The number one benchmark on any market is demand. We are seeing a continued growth in demand, and we have something to offer to this market. So I would disagree with people saying that the playing field is limited.
Can you describe your target group of banking clients?
Idelsons: For Signet Bank, these are entrepreneurs: not only wealthy individuals that have accumulated considerable capital, but also less-established local businesspeople that are still in the active development phase — they might not have a lot of cash on hand, but their operations are healthy and showing success. Our bank can’t offer the range of products large corporates expect, so we are not going for that segment — but we do have a good selection of services for midsize companies owned by local entrepreneurs.
Latiševs: The main product BlueOrange provides is lending to small and medium businesses in a number of sectors from manufacturing to trade finance. We have vast experience with logistics and shipping in particular. Our financial capacity allows us to meet the needs of large corporations, which generally seek loans of over 10 million euros.
Could you say there is a new segment of banking taking shape in Latvia?
Idelsons: It has taken shape already. Locally-owned banks are actively involved in economic processes and current social developments in Latvia. I really hope the potential of these banks — and the benefit of investing in our country’s future — will only increase.
What can locally funded banks do just as well or better in competition with foreign capital?
Idelsons: Free environment is all about the ability to compete, and I believe local banks can compete well by making decisions faster, since the management is closer to the client. It might sound banal but service quality determines a lot more than the number of “unique products”, and banks with local capital can successfully compete against large international ones, especially in the small and medium enterprise segment. In many situations, we have the crucial flexibility to think outside the box, lean in, and address client’s specific needs. Standardised approaches and large volumes can prevent the foreign giants from doing it well.
Latiševs: Competition is what drives development. Yes, technically, one or two banks in Latvia could service everyone. But look at our neighbours in Lithuania, where the banking sector shrank much faster than ours. We regularly hear about entrepreneurs there being unable to find a financing solution. The larger number of banks in Latvia means businesses have more choices — the question is, how well do they navigate these choices, are they making good use of them?
What advantages can clients have?
Latiševs: I will mention a case from our practice. One client had an EU funding approval to build new a manufacturing facility, but they needed to secure co-financing. They asked their bank, and the response seemed positive at first — but then there were many incomprehensible delays with getting the actual funds. The entrepreneur already had agreements concluded with suppliers and a finalised construction design, while seasonal factors played a large role in the development project. After two months of waiting, the client asked us if there was any way to get financed more quickly, and there was. The other bank was unhappy, of course. This is just one example of how competition can benefit any client.
The reputation of banks in the Baltics has suffered a lot in the past few years. Improving their image remains an issue. What effort is being made?
Latiševs: The state did a lot by revising legislation and introducing restrictions on servicing foreign clients. Numerous banks have overhauled their business strategies. It would be unfair to make judgements about the current situation through the prism of yesterday. The banking monitoring requirements were very different a decade ago, and the banks met the requirements in place at the time. At the turn of the 21st century, banks had practically zero accountability for client compliance. Regulatory authorities just didn’t have any coherent demands, which meant financial institutions did not maintain trained specialists or complex monitoring systems. In the late 2000s, requirements became stricter, and today banks hold a large share of responsibility for overseeing the activities of their clients. Most of the today’s criticism of banks is based on old news — back then, regulators’ expectations were very different. A lot has been done since then in training compliance personnel and introducing comprehensive IT solutions. Another change that had to happen was defining suitable business strategies going forward, preventing banks from accepting excessive risk. As far as I’m aware, most banks accomplished this in 2018, presenting their strategies and receiving approval from the Financial and Capital Markets Commission (FCMC). Thirdly, local society and partners abroad must be informed about the steps that have been taken. A lot has been achieved already, yet there are no positive news about our banking sector anywhere in Latvia or abroad. Proactive communication with foreign media has been lacking. Meanwhile, numerous negative publications during recent years were mostly based on older events. Unfortunately, practically no new objective analytics has come out so far.
Whose responsibility would that be?
Latiševs: I believe the Finance Latvia association should do more in this regard, and state institutions should get involved — after all, this is a matter of the entire country’s reputation. Everyone I know is anticipating the Moneyval report as the moment of truth, but that is still months away! A lot more can, and should be done before it comes out.
Idelsons: Despite the negative information, I would describe the banking sector as undergoing a normal evolutionary process. The so-called “bad” non-resident banks have switched to serving the local market, and it is bringing real benefits, making an economic contribution. This has gone unnoticed so far. Secondly, I think the banking regulator is behind on what is going on with the market right now, sticking to outdated capital adequacy and liquidity restrictions that were approved when all these banks were still focused on the non-resident business. We are all working for the local market now, after being given just three months to switch. Meanwhile, the FCMC has not revised any regulatory requirements for more than a year. Why do businesses have to adjust so quickly while for regulators it takes a whole year? It is not asking for an extraordinary support, just a level playing field — the capital adequacy ratio for “large”, i. e. Scandinavian and American banks, remains at the level of 8%, while local capital banks have to work with the ratio of 16-20%. Thus local banks are only able to issue half as many loans per unit of capital, which affects costs and operational profitability. The competition is skewed.
Latiševs: I have met with German colleagues who openly acknowledge that AML compliance requirements in Latvia are far ahead of the ones in Germany. This includes the internal procedures banks use, the laws, and the requirements for clients. And yet we have to deal with a poor public image and constant negative news coverage.
What do you think will be the result of this financial system overhaul?
Idelsons: Firstly, we will come to conclusions as to the ability of the financial system of Latvia to meet the expectations of the external world, Moneyval and other supervisory institutions. At least as important is the question of whether the people in Latvia will be willing to change their attitude to money laundering. Banks will meet any demands, but what about accountants, lawyers, casinos, real estate brokers, international merchants? Do they understand how fundamental these new requirements are, and what they need to do to comply with them? Will our court system be able to make adequate decisions in money laundering cases? Until the society as such, and not just banks, is able to demonstrate a change in attitude, overcoming the international perception of Latvia will be difficult. Opinion leaders and the media play a large role in this process. If it does happen, Latvia will have learned a lot from these recent developments. If it does not — we might as well find ourselves in this situation for a long time.
Do you see any progress?
Idelsons: Of course. Most banks, as well as the government — especially the Ministry of Finance, the Financial Intelligence Service — are taking real action and communicating their achievements to international partners. Objectively, these are great results worthy of praise, and we must take note of them and speak confidently about them instead of looking for imaginary flaws and peddling fake news.
What should we expect next?
Idelsons: I don’t think clients understand that the banking market has moved towards expansion. Banks with domestic capital offer more choices to local clients. Every time I hear someone has a problem opening an account or receiving a loan, I can be sure that person did not do their homework — they should shop around, find out what are the options available in today’s banking market in Latvia.
Latiševs: I think improving the reputation of Latvia’s financial sector is a priority. The events of the past must be evaluated objectively, but mulling over them needs to stop. We must pursue new opportunities.